According to recent studies by PricewaterhouseCoopers on behalf of the International Franchise Association, there are over 850,000 franchised businesses in the United States (including approximately 26,000 in Virginia) that account for over $8 billion in economic output and 9.5 million jobs. For many individuals contemplating career options and opportunities in this challenging economy, franchising is an attractive option because it can provide opportunities for a person to enjoy the benefits of owning their own business while simultaneously benefiting from access to an existing business system with an established reputation and professional training and assistance.
Franchising is not for everyone, however. Anyone considering an investment in a franchise opportunity should be prepared to devote considerable time, money, and effort to the process of researching various franchisors and carefully analyzing what each franchise system has to offer. Obtaining professional assistance is an important part of the process, and you should be just as selective in choosing your advisors as you are in selecting franchisors.
A franchise agreement is possibly one of the most important contracts you will ever sign. Before making any final decisions, you should consider a variety of issues, including the following:
- Investing in a franchised business does not guarantee financial success, nor does it eliminate risk.
- You should expect to work very hard. While positive energy and passion are important, starting a franchised business is not a hobby or recreational activity.
- As with any start-up business, you must carefully budget for expected start-up and ongoing operating expenses. Be realistic. Even under optimal circumstances, it might take 12 to 24 months before your business becomes profitable. Plan accordingly.
- Investigate and research a number of franchisors before settling on a particular franchise. Interview as many current and former franchisees of your selected franchise as possible before making a final decision.
- Review all franchise disclosure documents and contracts carefully. Virginia is the only state in the U.S. that requires franchisors to negotiate with prospects in good faith. Understanding your rights and obligations under a franchise agreement is essential.
Selecting a franchise involves more than determining which franchise charges the lowest fees or claims to have the highest number of franchisees. A prospective franchisee should research and review industry articles, reviews, and blogs comparing and contrasting franchisors in a chosen industry. For example, Entrepreneur Magazine publishes an annual review of top franchise systems. The Internet is a great resource for researching and evaluating franchisors.
Perhaps the most important source of information about a franchise system is its Franchise Disclosure Document (“FDD”), the disclosure document required by law that describes key aspects of the franchise being offered for sale. Franchisors are required to provide a FDD to prospective franchisees at least 14 days before a franchise agreement is signed or money changes hands. This waiting period is designed to give prospects an opportunity to review the franchise agreement and other franchise documents, seek professional assistance, negotiate changes to the franchise agreement, and make an informed decision as to whether to move forward.
Making a decision to invest in a franchised business requires a lot of homework, but, in the long run, careful research and planning will pay off.
Twenty “Big Picture” Questions for a Prospective Franchisee to Consider
- Is my personality conducive to following a set of rules set by someone else?
- What are my business goals and strategic priorities for selecting a franchise system?
- Does this franchise system appear to have a sustainable business model that has withstood the test of time?
- Is this franchise system led by an experienced management team?
- How does the franchise system typically address problems with its franchisees? (e.g., is the franchisor often involved in franchise-related litigation?)
- Have more than 10% of the franchisees left the system in the last two years? If so, why?
- Can I afford this franchise? What are my sources of financing?
- Under what circumstances can the franchisor terminate my franchise?
- How are franchisee concerns and complaints commonly addressed by the franchisor?
- What assistance will the franchisor provide in setting up my business and on an ongoing basis (i.e., site selection, obtaining required licenses, employee training, marketing, etc.)?
- What is the duration of the franchise agreement? Do I have one or more options to renew? If so, under what conditions and at what cost?
- Are there restrictions on my ability to transfer or sell the business in the future?
- What is the financial condition of the franchisor and what are its primary sources of revenue?
- Is the fee structure comparable to that of other franchises in the same industry? If not, what is the explanation or justification for the deviation?
- Does the franchisor offer similar goods or services through company-owned units or other channels of distribution that might compete with its franchisees?
- Are franchisees required to purchase inventory, supplies, or services directly from the franchisor or its affiliates?
- Is there an active franchisee association or advisory council?
- Has the franchisor made any statements or provided me with information different from what was disclosed in the FDD?
- Does the franchise system validate well with its existing franchisees (i.e., get positive reviews)?
- Am I convinced that management of the franchisor is trustworthy and committed to the long-term success of the system?